2013 CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT REPORT
TAKING
THE LONG VIEW
OUR CLIENTS’ FUTURES DEPEND ON OUR ABILITY TO MAXIMIZE THE VALUE OF THE ASSETS THEY ENTRUST TO US
BlackRock’s clients come from all walks of life—from workers to retirees to global institutions—but they have all put their trust in us to help secure better financial futures for themselves or the people they serve. This immense responsibility requires that we be good stewards of their investments, addressing short-term challenges but always keeping our eyes on the long term, especially since two-thirds of the assets we manage involve retirement savings. That’s why we believe the companies we invest in should focus on achieving sustainable, long-term returns. While many corporate leaders today lament the short-termism of the capital markets, they can and should challenge those demands by focusing on the future and persuasively communicating strategies for sustainable growth. They must set the stage to attract the patient capital they seek: explaining to investors what drives real value, how and when far-sighted investments will deliver returns, how risks are being anticipated and addressed, and, perhaps most importantly, what metrics shareholders should use to assess management’s success over time. In the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Cash has been building on corporate balance sheets. Capital budgets have been cut to boost buybacks and dividends. Many are even borrowing to finance higher payouts. These strategies are often aimed at share price appreciation, but can mortgage a company’s future, if not managed properly. Returning cash to shareholders certainly has a place as part of a balanced capital strategy, and the appropriate level will vary for different companies and different industries. But companies in manufacturing, technology, energy and many other sectors will suffer slowing growth if they fail to make farsighted investments. Corporate leaders need to balance the many competing demands on their companies with an eye on both today and tomorrow. They must drive near-term performance while simultaneously making those investments—in innovation and product enhancements, capital plant and equipment, employee development, and internal controls and technology—that will maintain sustainable growth. They also must manage productive relationships not only with shareholders, but with clients, employees, commercial partners, communities and governments. BlackRock’s Corporate Governance and Responsible Investment team seeks to understand the drivers of longer-term performance. A primary goal, and the focus of our governance work, is to assess the quality of the leadership at companies in which we invest. We appreciate that successful companies come in many shapes and sizes and that good governance alone does not generate financial returns. But in our experience, well-managed, well-led companies with clearly understood strategies, sound operational practices and a focus on the future tend to deliver more consistent returns over time, withstanding shortterm shocks by building trust with long-term shareholders and other stakeholders. This kind of good governance is the ultimate risk-management strategy, which is crucial to us as investors. Accordingly, we encourage companies to engage with us in an ongoing dialogue addressing specific governance issues, an approach we consider more productive and less distracting than taking high-profile “activist” positions. Just as BlackRock’s mission is to earn the trust of our clients by helping them meet their long-term investment goals, through our governance program, we also aim to be a trusted, responsible shareholder with a long-term horizon. By helping to keep a focus on the future among both our clients and the companies in which we invest, we believe we can contribute to more robust capital markets, better and more sustainable performance, and true corporate responsibility that benefits the clients we serve and society as a whole.
Larry Fink Chairman and CEO of BlackRock
This review is intended to explain BlackRock’s overarching philosophy in relation to corporate governance and responsible investment and to provide practical examples of our work in 2013. It is organized in a variety of overlapping themes, which provide a sense of the breadth and complexity of this aspect of BlackRock’s work on behalf of clients.
FRAME
What guides our corporate governance and responsible investment work Profile of the team Recent developments in governance globally that shape our approach
PARTNER
How we integrate our work with that of our investment colleagues How we work together with clients to provide responsible investing solutions Products and services we have developed to meet client needs
ENGAGE
Communicating with companies to improve mutual understanding Examples of engagements undertaken in 2013 Engagement statistics
ANALYZE
How we research companies for voting and engagement BlackRock’s governance risk model Use of proxy advisory firms
VOTE
Our voting process Examples of our voting in practice Voting statistics
INFORM
Informing ourselves on a range of governance issues Informing the public debate Oversight of our governance program
CONTRIBUTE
ur participation in the public policy process O Organizations in which we are involved Our support of the United Nations Supported Principles for Responsible Investment (PRI)
Committed to Protecting and Enhancing the Value of Our Clients’ Assets
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FRAME At BlackRock we frame our corporate governance program, including the treatment of social, ethical and environmental issues, within an investment context. We believe that a sound corporate governance framework promotes strong leadership by boards of directors as well as good management practices, contributing to the long-term success of companies and better risk-adjusted returns to our clients. We recognize that corporate governance practices and expectations differ around the world. Even so, there are high-level corporate governance principles that we believe apply universally: transparency and accountability to those who provide capital; oversight by a well-informed, experienced board; robust accounting and risk management systems; and sound policies on business management issues such as employee and supplier relations, environmental impacts and compliance with regulations. Our Corporate Governance and Responsible Investment (CGRI) team develops and applies our framework. The team is structured to be local but coordinate globally. The corporate governance program led by the CGRI team is integrated within all portfolios investing in public companies, whether clients invest in specialist socially responsible investment (SRI) products or in our core index and active investment strategies. The CGRI team acts as a central clearinghouse of BlackRock’s views across the various portfolios with holdings in individual companies and aims to present a clear and consistent message. The team is represented in San Francisco, New York, London, Tokyo, Hong Kong and Sydney. Team members work closely with regional and global investment and client-facing colleagues in engaging with companies and clients, respectively. We also engage locally with regulators and commentators, as well as other shareholders, to ensure that we are aware, and understand the implications for our clients, of policy developments and emerging practices and trends. BlackRock’s clients are a diverse group of investors, including corporate, public, and multi-employer pension plans, insurance companies; mutual funds; endowments; foundations; charities; corporations; official institutions; banks; and individuals. Some have expressed their views on corporate governance, while others have not. The one thing they have all asked of us is to protect and enhance the value of their assets. In pursuit of that goal, the CGRI team members use their professional judgment to determine which engagements to undertake, and how to vote at shareholder meetings, to best protect the economic interests of clients.
leadership & accountability Good governance is about leadership. We focus our efforts on the board of directors because, without board and executivesuite leadership, companies may not have sound governance practices that cover a range of critical business issues, including environmental and social impact. In most markets, shareholders can hold directors accountable by removing them from office if they fail to act on their behalf.
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TAKING THE LONG VIEW窶認RAME
OUR GUIDING CORPORATE GOVERNANCE PHILOSOPHY AT A GLANCE:
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As a fiduciary investor, our primary duty is to act in our clients’ best interests. As a long-term investor, with significant investment in index-tracking strategies, we’re patient and persistent and we work with our portfolio companies to build trust and develop mutual understanding. As a large investor, we are able—and feel a responsibility—to monitor the companies in which we invest and to engage with them constructively and privately where we believe that would help protect shareholders’ interests. We don’t try to micromanage companies; we present our views as a longterm shareholder and listen to companies’ responses. We see environmental and social issues as corporate governance issues, integral to successful company management. We promote best practices in corporate governance because we believe that practitioner-led solutions are generally more effective than regulatory ones. We don’t discuss company engagements publicly because you don’t need to make headlines to protect shareholder value. We will vote against management when we judge that direct engagement has failed. Our corporate governance program is an investment function because it is focused on the long-term economic value associated with company leadership and management. We work closely with fundamental portfolio managers, acting as a clearinghouse across BlackRock’s investment teams, with the intention to present a consistent message to companies about governance.
BlackRock
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Global Team with a Local Presence Carrying out BlackRock’s work in corporate governance and responsible investment is a group of 20 dedicated professionals who: Work in six offices in five countries in three key regions: the Americas; Europe, the Middle East and Africa (EMEA); and Asia-Pacific
our customized service Through our customized service: We consult with clients on governance and proxy policy development
We develop products that factor in social, ethical and environmental considerations, across a range of investment strategies We provide customized environmental, social and governance (ESG ) risk evaluation and reporting
Speak nine languages: French, Spanish, Russian, Japanese, Mandarin Chinese, German, Danish, Portuguese and English
Have earned more than 15 different degrees
Include 10 members who each have a decade or more of experience in governance Vote in more than 85 markets and engage with over 1,500 public companies each year Our regionally focused teams evaluate and engage with portfolio companies on environmental, social, governance (ESG) and ethical risks within their local markets on behalf of BlackRock’s clients globally. We also work closely with internal and external experts around the globe to further inform our thinking. The CGRI team also helps deliver value to clients through a range of specialist services that aid their understanding of the environmental, social and governance characteristics of their investments. Through our overarching governance program: We evaluate how the companies in which we invest are governed and how they manage environmental, social and ethical issues We build relationships with our portfolio companies to reach mutual understanding on performance issues, strategy and risk mitigation We conduct proxy voting in line with BlackRock’s policies and report on our voting to clients We provide market updates on the evolving corporate governance landscape
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TAKING THE LONG VIEW—FRAME
GLOBAL TEAM PRESENCE
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Drawing on the global expertise of our: Portfolio Managers Researchers Resources
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Strategic Product Management | Product Management | Corporate Governance | BlackRock Investment Institute
Strategic Product Management | Product Management | Corporate Governance | BlackRock Investment Institute
BlackRock
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The Evolution of Global Corporate Governance The corporate governance landscape is continually evolving. Accordingly, BlackRock adapts its policies and practices to reflect the changing environment. We monitor issues and trends, and we participate in public discussions that help to shape the framework within which we and the companies we invest in must operate. These are some of the global trends we’ve been tracking.
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Facilitating Transparency in Swiss “Share Blocking” BlackRock started to actively engage with key participants in the voting chain in Switzerland, seeking to improve our understanding of actual and perceived impediments to trading when voting at shareholder meetings of Swiss issuers. Because of voting-related complexities specific to the Swiss market and individual issuers, we are currently adopting a voting policy in this market that leads us to not vote at shareholder meetings that employ share blocking. The restriction that is imposed when a vote is cast represents a liquidity constraint on the portfolio managers and increases the risk of failed trades, which can be costly to clients. As part of our discussions, we reviewed the voting chain and practices with companies’ share registrars and local custodian banks, as well as with other financial intermediaries. We pursued this market-wide engagement with the aim to complete it before the beginning of the 2013 voting season, with the ultimate goal of voting in this market unencumbered. As a result, we clarified that the market does not technically employ blocking; however, due to varying share registration processes between local custodians and registrars, trades may be late to settle if the shares were in the process of being registered for voting. In our view, this is still a form of share blocking, and we will continue to monitor the Swiss market for improvements in the registration process. Additionally, we engaged with a Swiss luxury goods company around its use of bearer shares. Shareholders who wish to vote at shareholder meetings of companies issuing bearer shares are subject to a legal block on trading prior to the meeting. Given the resulting liquidity constraints, many shareholders do not exercise their voting rights at companies with bearer shares in Switzerland. The majority of Swiss companies have switched to registered shares in recent years, which we encouraged the luxury goods company to do. During the second quarter the company made a public announcement that it will be asking shareholders to support the conversion of its bearer shares to registered shares at its next annual meeting, allowing shareholders for the first time to vote while maintaining the flexibility to sell their shares.
[10] TAKING THE LONG VIEW—FRAME
Commenting on a New Market Structure for Russian Companies The Moscow Exchange proposed to create a new market structure called Novy Rynok (“new market”), which is a premium listing segment with higher corporate governance standards, similar to Brazil’s Novo Mercado. The new market could prove to be a positive step in improving corporate governance standards in Russia, as it is intended for those issuers with good corporate governance practices and is expected to provide increased protection for minority shareholders and enhanced transparency. At the same time, the Russian Federal Financial Markets Service published a draft document with a number of changes to the Russian Code of Corporate Governance, first issued in 2002, in an effort to update and strengthen it. BlackRock took the opportunity of providing comments on the changes, seeking to share our thoughts on how to improve shareholder rights and corporate governance practices in Russia. The main topics of feedback were the need for more board and committee independence, and the need for more communication between boards and minority shareholders. Finally, the response stressed the importance of providing investors with better and more information, especially around concert parties, related party transactions and major corporate transactions, including the role of the board and its independent directors in how these transactions are reviewed and approved. Given the major changes that the Russian market is undergoing, BlackRock will continue its engagement efforts to ensure that policymakers and other market players understand the importance of improving shareholder rights and adopting better corporate governance standards.
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“Report or Explain” on Australian Sustainability The Australian Council of Superannuation Investors (ACSI) represents superannuation funds that account for about 16% of Australian superannuation investments. It recently published its report on sustainability reporting practices in the ASX200. The council’s approach is based on the premise that environmental, social and governance risks have a material effect on the long-term viability of companies. Thorough disclosure of information regarding company performance in relation to these “sustainability risks” is therefore integral to quality investment decision-making. ACSI’s research indicated that while there have been some minor improvements in sustainability reporting over the five-year research period, the majority of ASX200 companies have yet to provide sufficient reporting on their performance against sustainability risks. ACSI said that it will be lobbying the Australian government to encourage a “report or explain” approach on sustainability issues.
B l a c k R o c k [11]
Moving Toward Independent Directors in Japan Japan’s Ministry of Justice publicized a draft of its “Final Proposal of Revision to the Companies Act” stating: “listed companies shall strive to secure at least one independent board member as an outside director.” Consistent with this resolution, public companies without outside directors will be required to disclose “the reason why appointing an outside director would be inappropriate.” Furthermore, the Tokyo Stock Exchange (TSE) has announced its draft plan to review listing regulations and again requested listed companies to secure an independent outside director on their boards. TSE also encourages listed companies currently with a governance structure that includes statutory auditors to consider transitioning to an “Audit and Supervisory Committee” structure. TSE will approach the request utilizing a “comply or explain” framework. We believe this to be part of a trend toward greater independence in Japanese board rooms. For example, a larger car manufacturer introduced three outside directors to its board and shareholders approved their appointment. The company had been an adamant proponent of the all-insider board structure, which has been prevalent in Japan for over five decades. The decision will likely have an impact on many other Japanese companies that have refused to admit outsiders to their boards.
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Strengthening the Danish Corporate Governance Code A consultation was issued by the Danish Business Authority asking market participants for feedback on changes to the Danish Corporate Governance Code. BlackRock focused its response in three areas: shareholder engagement, executive remuneration and board appointments. On the first aspect, we highlighted the need for the code to be more explicit in emphasizing the need for board members to lead the firm’s corporate governance engagement efforts. We also stressed the need for the code to be more explicit in encouraging issuers to be more transparent with their identification, selection and nomination processes for board members. Finally, we highlighted the need for the code to encourage remuneration reports to be more explicit in their descriptions on how executive incentive schemes support the achievement of strategic objectives.
Enhancing the UK Stewardship Dialogue The United Kingdom’s Institute of Chartered Secretaries and Administrators, commissioned by the 2020 Investor Stewardship Working Party, of which BlackRock is a member, published its guide entitled “Enhancing Stewardship Dialogue.” The guide, which aims to facilitate good engagement practices between boards and their shareholders, states that companies and institutional investors need to focus more on discussing strategy and long-term performance as well as the factors that create or destroy value. A key principle of the guidance is that there should be a regular and consistent process of engagement. Other recommendations include identifying and developing a core of supportive and/ or long-term investors, making better use of the general shareholder meetings as an opportunity for communication, and improving feedback on the quality and quantity of engagement activity.
[12] TAKING THE LONG VIEW—FRAME
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Executive Compensation Discussions Are a Global Trend US Board Compensation Matters A key issue emerging in US proxy contests is the compensation of dissident board candidates. In two prominent situations, activist investors stated that, in order to interest qualified independent board candidates, those candidates needed to be offered compensation by the activist in addition to the fees they would earn as a director, if elected. Both compensation programs were designed to leave the director candidates “independent” of the activist, but also gave financial upside to the candidates tied to the potential upside for the activist. In both situations, we held a series of meetings with the activist and management to understand the drivers of company performance, to assess each side’s claims, and to ascertain each side’s proposed candidates. We also addressed the concerns raised by the controversial compensation and explored the possibility of eliminating the program. One activist ultimately announced changes to the compensation; the other activist did not. In the contest where the payments were changed, the company announced a settlement. In the contest where the activist did not change the payments, the activist narrowly failed, with several investors publicly stating that the compensation was a deciding factor in their vote. BlackRock was supportive of dissident candidates in both situations, but this compensation question is one that shareholders will need to wrestle with in coming years.
Sign-on Bonuses in Europe Merit Conditions During the course of the year, a number of companies reported making recruitment awards to newly appointed executives to compensate them for incentives foregone at their previous company. While BlackRock supports such awards, we believe they should not cover the component of a prior award that has not yet achieved the performance hurdles set (i.e., has not technically been earned). Grants made by the hiring company to compensate a newly recruited executive for awards foregone elsewhere should have performance conditions and vest over time. Where this is not the case, BlackRock will withhold support from the approval of the remuneration report.
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Australian Engagements Lead to Long-Term Incentives BlackRock had concerns with two companies in Australia regarding the structure of their executive remuneration being skewed toward short-term cash incentives. At one company, the time horizon of the company’s strategy was significantly longer than the one-year performance period applying to the CEO’s incentive plan. Our concern was that the success of strategic initiatives would not be known for at least five years, yet the CEO was receiving rewards measured over periods of one year. At another company, the remuneration report did not disclose the accounting measure used in its short-term incentive plan. Therefore, BlackRock had a number of meetings with the chairs of the remuneration committees of both companies. One company agreed to review the structure of the CEO’s remuneration to align it with the longer-term nature of its’ business, while the other agreed to publically disclose the performance measures via an announcement to the Australian Securities Exchange (ASX), to ensure that all shareholders understood the performance measure.
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T EN M GE A G FR AM PORTFOLIO MANAGER DISCUSSIONS PORTFOLIO SCREENS
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Integrating ESG Strengthens Our Investment Process
RESPONSIBLE INVESTMENT PRODUCTS CUSTOM CLIENT SOLUTIONS
PARTNER Our Investment Process At BlackRock, we actively seek to integrate environmental, social and corporate governance (ESG) issues into our investment process. This begins with the mind-set that ESG factors are often a signal of or proxy for management quality, particularly over the longer term. Our CGRI team therefore partners closely with colleagues in portfolio management to help raise awareness of potential risks, such as exposure to companies that are more likely to face litigation, or reputational harm as a result of negative impact on the environment or communities.
CGRI INTEGRATED INTO THE INVESTMENT PROCESS
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Responsible investment mandate
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Investment evaluation to buy/sell explicitly includes ESG factors:
Investment evaluation to buy/sell may include ESG factors:
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Scientific Active—quantitative modeling
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Aggregation of investments held by BlackRock globally across RI and traditional mandates
Analysis of ESG risks and opportunities at our aggregated investments
Relationship management, engagement and proxy voting
Feedback mechanism into Step 2 based on the mandate and product type
Responsible Investment How we integrate responsible investment varies based on the investment mandate and the style of portfolio management. Our traditional mandates cover the spectrum of fundamental, scientific active and index investing. Fundamental our responsible investment products BlackRock manages US $249 billion (6% of our assets under management as of December 31, 2013) in responsible investment mandates that may include negative screening, positive screening, themes such as renewable energy, or sustainability indices.
Portfolio managers employing fundamental analysis consider all factors that they believe will affect the financial performance of companies, leading to a strong partnership with our CGRI team that benefits clients invested in other strategies, like index funds, as well. For example, a health care company in which BlackRock has a large long-standing passive investment and an active investment became subject to dissident investor action this year. The US fundamental equity group and the CGRI team collaborated over the course of approximately a month to conduct a series of joint conference calls within BlackRock, and with the senior management of the company, the group of activist investors and several of the new board nominees. As the conversations proceeded and both teams’ perspectives evolved, it became evident that the joint analysis was essential to our making the right decision for our clients. The corporate governance changes that the CGRI team advocated were incorporated into the company’s bylaws, which created more confidence about our investment in the company. This type of collaboration also benefits our clients that hold this security through index funds.
Scientific Active Our proprietary quantitative models seek to identify the relevance of ESG-related data like employee diversity, employee satisfaction, environmental liabilities, and natural resource usage for forecasting returns. Colleagues in Scientific Active have partnered with CGRI to develop their research agenda, assess ESG-related disclosures, and consider new data sources and other related topics.
Index Where clients are invested across an index and unable to sell underperforming companies, we engage and vote to address ESG and financial concerns. In indexed strategies, such as iShares®, engagement with companies, including proxy voting, is the key means to integrate ESG factors into investing.
[16] TAKING THE LONG VIEW—PARTNER [16]
Evolving Field Is Fertile Ground Fresh Approaches There is a growing belief that well-managed businesses are more likely to consider how their activities relate to society at large. By being good corporate citizens, those companies are also better equipped to respond to unexpected events, limit reputational damage and adapt their way of doing business swiftly and successfully. You can see this in the growing demand for integrating environmental and social factors within the overall corporate governance approach and investment process. In addition, private, for-profit capital is seen by many as a powerful tool to address pressing world challenges such as climate change and economic development. In 2013, BlackRock assessed opportunities for products that would target a specific impact such as community development or mitigating climate change. BlackRock’s strategic product management team partnered with the firm’s investment, CGRI, product development and client teams, along with external experts, to explore solutions across asset classes. Impact investing is defined for purposes of this initiative as investments that target a reasonable, risk-adjusted rate of return and a measurable social or environmental impact. Impact measurement and reporting is considered a key component of this style of investment and is a focus for BlackRock as we continue to expand our product offerings for a diverse set of clients: An environmental foundation looking for “green” investments
A family trust seeking socially responsible investments
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CGRI partners closely with the Fundamental Equity Team in Hong Kong. We’re building an investment edge while reshaping thinking in Asia. Creating and integrating ESG scores into the team’s investment process helps reduce risk and improve decisionmaking while raising key issues that face investors and companies. It adds a high degree of value. MARC DESMIDT
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Managing Director Head of Alpha Strategies for BlackRock’s Asia Pacific Region
A health care organization wishing to avoid alcohol and tobacco companies
A faith-based group seeking consistency with its religious guidelines
A pension fund looking for access to sustainable infrastructure
An insurance company wishing to align community development and greenhouse gas mitigation with its fixed income investment portfolio
B l a c k R o c k [17]
The field of responsible investment is quickly evolving, presenting opportunities to develop a range of innovative investment products, services and strategies. As a leader in this field, BlackRock offers a variety of investment products that consider or actively target social, ethical and environmental concerns: Negative Screens: Available in our collective trust funds, RI mutual funds, and separate accounts, negative screens may be tailored to align financial solutions to clients’ values and beliefs
SCREENING
Socially Responsible Equity: This actively managed US large-cap core portfolio is based on our belief that reasonably valued, high-quality, sustainable businesses will outperform the market
Socially Responsible ETFs: A variety of index-based ETFs that focus on companies with positive ESG characteristics
ESG CONSIDERATIONS
Ecosolutions Investment Trust: Targets equities issued by companies that are tapping opportunities in new energy, water resources and agriculture
New Energy: Public equities focused on opportunities within the new energy sector that globally spans sectors such as wind, solar, building efficiency, power grids, hydro, storage, smart-grid and alternative vehicles
Carbon Efficiency: Composed of constituents with low carbon footprints and screens for human rights, labor concerns, environmental factors, corruption and controversial weapons
Green Bonds: Issuances from multilateral development banks whose proceeds are ringfenced for climate projects and can be incorporated into clients’ portfolios
IMPACT INVESTING
[18] TAKING THE LONG VIEW—PARTNER
Impact Investing: Separate accounts that allow clients to target impact outcomes such as climate change and economic development via a range of asset classes
Renewable Power: Gives institutional investors access to a dynamic, diversified portfolio of wind and solar power infrastructure investments
Partnering to Improve Mutual Understanding
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Protecting the Rights of Minority Shareholders We met with representatives of an electric utility in Brazil, including its controlling shareholder, to provide BlackRock’s perspective on a proposed transaction. We were concerned that the terms of the transaction could favor the controlling shareholder over minority investors. The CGRI team partnered with one of our fundamental active investment teams to assess the valuation of certain assets in the transaction as well as the strategy behind the restructuring of the company’s capitalization plan. We also reviewed the company’s commitments regarding the use of new capital raised in the transaction. Our efforts, along with separate simultaneous initiatives undertaken by other shareholders, encouraged the company to make changes to the previously announced transaction structure, thus reallocating more than US $1 billion to minority shareholders.
Collaboration Helps Secure Financing A Brazilian containers and packaging company proposed a controversial change in shareholding structure in order to finance a significant expansion and mitigate its risk of losing its market-leading position to competitors. Proxy advisors recommended a vote against the deal, based on the costs to minority shareholders. The CGRI team facilitated an engagement with BlackRock’s portfolio managers and senior executives at the company. On balance, we determined that the anticipated economic returns to our clients as a result of the company’s being able to finance its expansion and the proposed improved governance standards outweighed the immediate dilution and cost concerns. We voted to support the proposal, which ultimately passed. The company is now moving forward with this long-awaited development.
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Understanding the Balance of Power We met with a board member of a European financial institution, in conjunction with other investors, to discuss the company’s nomination process, board composition, CEO succession planning and general board effectiveness. The focus of this meeting was to exchange views on the balance of power at the board level, given the combined CEO and chairman position, as well as to gain a better understanding of the role and responsibilities of the lead and other independent directors. Among other topics, we also discussed the search and nomination process for both executives and non-executive board members. As a result of this engagement, the company has become more proactive in providing shareholders with enhanced and more-regular access to its board, thus facilitating engagements on wider governance matters.
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Working Together to Develop the Green Bond Market
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We are proud to team up with Zurich as the company commits to the Green Bond market segment at this important stage of the market’s development. By encouraging transparency, liquidity, rigorous inclusion credentials, and impact reporting, we can together contribute to the creation of a robust and credible market, which will have a greater impact than any singular investment in Green Bonds. BlackRock’s commitment to impact investing spans asset classes and enables our clients to access investment strategies that target a reasonable risk-adjusted rate of return in addition to positive and measureable social or environmental outcomes. KEN WILSON
Vice Chairman of BlackRock
[20] TAKING THE LONG VIEW—PARTNER
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In 2008 the World Bank launched a framework to help stimulate and coordinate investment to combat climate change, which ultimately led to the creation of what are now known as Green Bonds. The bonds fund projects around the world to reduce greenhouse gas emissions and provide community development assistance. In parallel, BlackRock was being asked for advice by clients seeking responsible investment opportunities in fixed income beyond traditional negative screening approaches. We viewed the work being conducted by the World Bank and other supranational issuers as an opportunity to align our clients’ investment interests with their objectives to support building resilient communities. As a result we secured a commitment from Zurich Insurance Group to invest up to US $1 billion into Green Bonds issued by the World Bank and other supranationals. As of now, the commitment made by Zurich is the largest investment in Green Bonds globally and is a part of the company’s responsible investment strategy. Cecilia Reyes, Zurich Insurance Group Chief Investment Officer, explained: “Responsible investment at Zurich is about ‘doing well and doing good.’ We manage our investment portfolio of over US $200 billion in a way that achieves superior risk-adjusted returns relative to liabilities for the benefit of our customers and shareholders, while also creating value for our employees and communities in which we live and work. Zurich recognizes that creating value for all its key stakeholders is crucial to long-term success. Green bonds are a good fit with Zurich’s overall investment strategy as well as its impact-investing aspirations, targeted to support sustainable development and resilient communities. It is an opportunity to invest both with impact and at a return fully compensating for the risk.” Zurich Insurance Group has a direct interest in sustainable economic growth and the development of resilient communities. Also, as a global insurer with a fastgrowing footprint in many emerging markets, the Group is directly exposed to the challenges related to potential effects of climate change or the intensive use of scarce natural resources. In line with this, Zurich is building a portfolio of impact investments addressing these challenges. Through this particular investment, Zurich will effectively support more sustainable growth and development— without sacrificing investment return.
B l a c k R o c k [21]
Protecting the Value of Clients’ Assets Through Constructive Communication
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ENGAGE As a fiduciary asset manager, we have a duty to act in our clients’ best interests. This includes protecting and enhancing the value of our clients’ assets—in other words, the companies in which we invest on their behalf. We believe that good corporate governance—driven by strong board and executive leadership and by sound governance policies—protects and enhances long-term shareholder value. Engagement also allows us both to share our philosophy and approach to investment and corporate governance with issuers and to enhance their understanding of our objectives. It also gives us the opportunity to improve our understanding of investee companies and their governance structures as well as to better inform our voting and investment decisions. The key to effective engagement is constructive and private communication. We prefer to engage with companies rather than exclude them from our investment universe, because investors have influence and access. The CGRI team collaborates or consults with fundamental portfolio managers who have market-, sector- and company-specific expertise. We assess each company’s case on its merits and are pragmatic unless we believe that an immediate response is required. We focus our efforts on what we consider to be material to the long-term sustainability of the company concerned. We engage with companies for four main reasons:
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We are preparing to vote at the company’s shareholder meeting and need to clarify the information in company disclosures There has been an event at the company that has impacted the company or may impact long-term company value The company is in a sector or market where there is a thematic governance issue material to shareholder value Our proprietary corporate governance risk model has identified the company as lagging its peers on environmental, social or governance matters that may impact economic value
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Whether it’s the fundamental portfolio managers or governance team members leading on an engagement, our close collaboration ensures that we give companies a consistent message about the importance we place on board leadership and quality of management in delivering long-term shareholder value. QUINTIN PRICE
”
Global Head of BlackRock’s Alpha Strategies Group
How Do We Engage? We engage in a constructive manner. Our aim is to build mutual understanding, not to tell companies what to do. We meet with executives and board directors, we communicate with the company’s advisors, and we engage with other shareholders where appropriate. We also vote at shareholder meetings, and will vote against a company’s proposals if engagement fails to resolve our concerns. The following examples from 2013 demonstrate the wide range of issues our engagements cover, and the different purposes of engagement meetings. These include improving mutual company-shareholder understanding, BlackRock challenging a company on the approach it is taking and seeking change, as well as building long-term relationships that will pay dividends in unforeseen ways in the future.
1
Complex Merger Proposals Undermine Trust
“
As an index manager, our engagement program takes on even greater importance as we act as a fiduciary to our clients. In many cases, we have no choice but to hold certain stocks, given their index representation. Because divestment is not an option, we must focus on seeking to promote better corporate governance. AMY SCHIOLDAGER
”
Global Head of BlackRock’s Beta Strategies Group
[24] TAKING THE LONG VIEW—ENGAGE
Over the course of the year, our European CGRI team spent considerable time on the proposed merger between a mining group and a commodities trader. Shareholders at the mining company were required to vote on the approval of the merger and related management incentives such as retention payments. BlackRock voted in support of the merger without the revised retention payments due to lack of disclosure on the individuals included in the retention plan and the rationale for their retention. The items put to a shareholder vote at the other entity were significantly less contentious and BlackRock voted in favor of all proposals. A few months later, the newly merged entity held its first shareholder meeting. One of the key items of business was to elect the board. In line with the merger agreement, a number of former directors from the mining group were proposed for election. We engaged with the management team ahead of the annual general meeting to convey our reservations about the ability of these directors to represent the interests of all shareholders in the new company, and to understand the implications of the merger agreement with respect to the final board structure. We voted against the election of the former directors of the mining group since, in our view, they failed to represent shareholder interests during the process of the merger. At the meeting, the candidate for the chairman role withdrew his candidacy because the voting did not support his election. Another former director of the mining group also withdrew, while the others failed to achieve majority support for their election to the board.
Split-Card Voting in Activist Situations In the US, regulatory standards pose an obstacle for shareholders who want to pick and choose a mix of director candidates from each of the two slates proposed by an activist investor and management. From an investor perspective, achieving the optimal vote requires the creation of a “split-card” vote, which is only possible through working closely with the activist and the company. A US precious metals company faced a proxy contest for seven of eight board seats, with dissidents citing a number of strategic and governance failures, including the board’s decision to undertake a major acquisition of a mining site outside the company’s traditional area of expertise, a transaction that immediately reduced value. Management asserted that one of the dissident candidates, the company’s former CEO, was attempting to take control of the company. BlackRock met with both sides to assess the credibility of management and dissidents’ claims and to evaluate the qualifications and suitability of the 15 director candidates. When we realized that the large scale of our investment in the company potentially made our vote key to the outcome of the election, we identified the need to vote a split card, and we worked closely with the company and the activist to be sure that our ballots would be accepted. Ultimately, four dissidents were elected to the board, along with four legacy directors, consistent with our vote; subsequently, the CEO retired and the COO stepped into the role of interim CEO.
2
GLOBAL ESG ENGAGEMENT BY REGION
46% AMERICAS
23% EMEA
31% ASIA PAC
B l a c k R o c k [25]
3
Shareholder Blocks Vote on Shareholder-Friendly Changes At a US technology company’s annual general meeting, the company sought to amend its articles of incorporation in a bundled proposal that included a number of provisions that are generally viewed as shareholder friendly. An activist shareholder publicly opposed these changes as part of a campaign to drive the company to pay significant dividends to shareholders. BlackRock engaged with senior leadership at the company to build understanding on BlackRock’s approach to corporate governance, to explore key issues related to the vote, and to communicate our views in support of the company’s proposed changes to the articles of incorporation. We also met with the activist to better understand its concerns regarding the proposed changes to the articles of incorporation. Ultimately, BlackRock voted in support of management’s recommendations at the shareholder meeting; however, the activist successfully blocked shareholders from voting on the article amendments after a US District Court found in the activist’s favor on the grounds that the proposal violated Security and Exchange Commission’s (SEC) bundling rules. We will monitor for an SEC response and/or implications for other companies as a result of the court decision regarding bundling.
GLOBAL ESG ENGAGEMENT BY UNPRI* DURATION CLASSIFICATION AND TOPIC (ENVIRONMENT, SOCIAL, GOVERNANCE) UNPRI Engagement Duration Classification
Engagement Topic
Region
Total
Basic
Moderate
Extensive
Environment
Social
Governance
Japan
122
97
22
4
0
0
118
Asia ex-Japan
210
30
137
41
22
27
190
EMEA ex-UK
231
98
94
57
6
7
241
United Kingdom
211
169
48
32
74
12
174
Americas
658
378
215
65
38
65
657
1,432
772
516
199
140
111
1,380
Total *
United Nations - Principles for Responsible Investment
Safeguards Implemented to Mitigate Potential Conflicts We engaged with a European integrated energy solutions provider over a proposed change in its governance structure and the succession plan for the chairman position. The company proposed to unify the two-tiered board structure into a unitary board and recombine the roles of chief executive and chairman in light of this change as well as the current chairman’s intention to retire. We do not have a strong preference between unitary and two-tiered boards. However, we are generally not supportive of a move to recombine CEO and chairman roles, as it may undermine the checks and balances that we like to see at the board level between management and oversight roles. Upon our engagement, the company implemented several safeguards in its bylaws to manage potential conflicts of interests, including changes that foresee the appointment of an independent lead director going forward as well as the creation of additional board committees to strengthen the board’s oversight role and set limits on the powers of the chief executive.
[26] TAKING THE LONG VIEW—ENGAGE
4
5
Engagements in Japan Are an Emerging Practice The CGRI team in Japan continued to experience an increase in the number of engagements, primarily driven by growing interest from companies in understanding the views of investors. The qualifications required of outside directors and statutory auditors continued to be the main topic of discussion. The noteworthy trend is the surge in the number of companies starting to engage with shareholders for the first time. This trend is clearly a sign of the heightened awareness of the benefits of engagement as a means of communication between a company’s management and investors. For example, BlackRock met with senior management of a major manufacturer in Japan to confirm the current state of the operation at its Indian plant, which was shut down due to a riot. The unrest involving its workers was triggered when a plant manager suspended a worker who had assaulted another manager. The company explained its continuing effort to determine the root cause while taking actions, including the layoff of the workers directly involved in the violence. Another topic addressed was succession planning due to the fact that the charismatic president and chairman is reaching retirement age. According to the company, it had appointed four representative directors with the title of vice president to develop the next-generation management team. Only recently would this type of shareholder engagement in Japan have occurred.
ENGAGEMENT TYPE BY UNPRI CLASSIFICATION
Basic 52% Moderate 35% Extensive 13%
Engagement Leads to Support of Management Under Fire A European renewable energy company was the subject of a number of shareholder proposals at its annual shareholder meeting. The shareholder sought support for the appointment of a scrutinizer to investigate the company’s historical business decisions, its accountancy practices, the election of auditors, board-level departures and the departure of the former CFO. Leading up to the shareholder meeting, and in cooperation with portfolio managers, we engaged both with the shareholder and separately with the Audit Committee chairman, and also with the newly appointed chairman of the board. Given the uncertainty of the proposals, their timing and the costs of additional investigations, we decided not to support the shareholder. This decision was also based on the recent changes that the board and management had made, including the resignation of the Audit Committee chairman and the replacement of the CEO.
6 B l a c k R o c k [27]
7
Engaging for Board Refreshment A global oil and gas company received significant media attention and public shareholder criticism for making an announcement that it would begin searching for a successor to the CEO after a relatively brief and generally well-received tenure. The board refuted media reports that the announcement was the result of internal board disagreement over company leadership. In advance of the 2013 annual meeting, BlackRock’s CGRI team determined to engage with the company regarding its executive succession plan, as well as on executive compensation, the ongoing role of the executive chairman, and the need for substantial board refreshment. Subsequent to our meeting with independent board members, the company announced clarification on the CEO’s expected tenure, and promulgated a series of substantive governance changes in areas including board leadership, executive succession and executive compensation. BlackRock ultimately voted against the longest-tenured directors on the board, given our view that this board was in need of substantial refreshment. Two of those long-tenured directors subsequently resigned from the board.
Engaging in Search of a Higher Price We initially voted against the proposed sale of an oil and gas company due to our concerns that the original cash and stock offer was the result of a sales process that was unlikely to have maximized value for shareholders. We also observed that improving company and industry fundamentals and a downturn in the value of the acquirer’s stock likely warranted increased consideration for the target company’s shareholders. We engaged with senior management prior to casting that vote, in order to better understand the key issues and to share our concerns. On the day of the scheduled merger vote, the company announced a special dividend program contingent on approval of the transaction. We concluded that the improved terms compensated shareholders appropriately, and we determined to change our vote to support the merger. The deal ultimately received shareholder approval.
9 [28] TAKING THE LONG VIEW—ENGAGE
8
Multiyear Engagement Continues to Yield Change In advance of a US technology company’s shareholder meeting, an activist shareholder sought the removal of several senior directors and a vote against the auditor. Key concerns cited by the activist included but were not limited to the quality and independence of the auditors following the write-down in the value of a significant portion of a major acquisition. The CGRI team held a series of meetings with the activists and members of the company’s board. These most recent meetings were a continuation of a series of meetings BlackRock has held over the past several years with members of the company’s board, covering a variety of key governance concerns including board membership and refreshment, director over-boarding, executive compensation, proxy access, company strategy and board leadership. In light of our long history of engagement with the board, we were able to have a nuanced conversation and we were confident that our concerns were understood and that the board would be able to respond appropriately. Subsequent to the shareholder vote, the board continued its process of self-transformation, which we believe will benefit shareholders over the long term.
B l a c k R o c k [29]
NT E EM G GA FR AM
GOVERNANCE THEMATICS
A N ALYZ E
ESG RISK IDENTIFICATION CUSTOM CLIENT REPORTING
PROACTIVE ENGAGEMENT
PARTN ER
ORM INF
TE BU I TR
E
CO N
TE VO
ANALYZE
EN
Analyzing Corporate Governance Involves a Variety of Inputs
ANALYZE Good corporate governance is complex. From a shareholder point of view, it involves in-depth analysis and an appreciation that there are different ways to run a company well. BlackRock supports unconventional approaches where we expect that they will serve the interests of long-term shareholders. To make a fair assessment of good governance, it helps to understand the local market’s culture and regulatory environment. No single governance model works best universally, and even when comparing developed markets, such as Japan, the US and the UK, we find significant differences. Our global team is well placed to review and address governance issues with an understanding of the local context. However, in most markets we find that financial transparency and the presence of directors who are independent of management and/or any controlling shareholders are key factors in reducing the risk of the negative financial consequences that can arise in a poorly governed company.
How We Use Internal and External Resources for Best Analysis One of our CGRI team responsibilities is analyzing the ESG performance of portfolio companies to assess any risks and issues to monitor or potentially engage. We use a proprietary methodology, along with third-party research from several leading external resources, to critically assess the ESG performance and risk exposure of our portfolio companies. Identifying those companies that are best-in-class on ESG criteria, and, at the other end of the spectrum, those that are lagging their peers, helps us to prioritize our engagements, anticipate controversies and monitor portfolio-specific ESG risk exposure. We use a database provided by a third-party to screen thousands of companies, using data points from publicly available sources such as annual reports, socially responsible investing websites and those of nongovernmental organizations. The database contains numerous key performance indicators to help assess economic, environmental, social and governance performance. We call this our “Governance Risk Signal” and we identify the leaders and laggards by overweighting the data points that we believe to be the most potentially material to financial performance. We then rank each company relative to the other companies in its region, and conduct a thorough review of the laggards (those with the lowest scores) to determine if engagement with the company—either to clarify the company’s approach or to seek change—would help to address the issues leading to its identification as a laggard. Every quarter we run the major global indices through the model to determine the ranking and we also monitor controversies at the companies in which we invest via news feeds, which we review weekly, as part of our overall ESG analysis and engagement strategy.
OVERALL ESG PERFORMANCE—KEY PERFORMANCE INDICATORS USED IN BLACKROCK’S GOVERNANCE RISK MODEL Economic
Environmental
Social
Governance
Client Loyalty
Controversies
Employment Quality
Board Composition
Brand Value
Resource Reduction
Health and Safety
Board Structure
Earnings Restatements
Emission Reduction
Training
Board Functions
Profit Warnings
Product Innovation
Diversity
Compensation
Insider Dealings
Human Rights
Shareholders’ Rights
Community
Product Responsibility
[32] TAKING THE LONG VIEW—ANALY ZE
Governance Includes Oversight of Key Social, Ethical and Environmental Risks Thematic Analysis and Proactive Engagement Protect Clients and Diversify Our Knowledge BlackRock launched a quarterly thematic analysis process, resulting in proactive engagement at the end of 2012. Each quarter we select an ESG theme against which to identify laggards in a peer group with whom engagement might be beneficial. As part of the process the team undertakes in-depth research into the theme and how it impacts longterm shareholder value. This process ensures a sound understanding within our team of a wide array of issues. Over the year, BlackRock’s CGRI team has selected the topics of board diversity, human rights in the supply chain, water management and hydraulic fracturing as our quarterly themes. In addition, we have engaged extensively with companies on issues ranging from sustainability reporting to sustainable palm oil. Regardless of whether we are conducting a thematic engagement or discussing an individual situation at a particular company, our starting point is to focus on the governance structure of a company, because the management of environmental and social matters should be part of governance. While corporate governance practices vary internationally and our expectations in relation to individual companies are based on the legal and regulatory framework that applies to them, we consider that certain principles apply globally. As part of this global approach, we believe that boards act as fiduciaries to shareholders, including the successful management of a company’s environmental and social impacts.
B l a c k R o c k [33]
1
Board Diversity To ensure that boards remain effective, we regularly review board members’ skills, experience, background, term of service and gender to assess whether there is an appropriate range of perspectives and expertise at the most senior level of the company. Our analysis also identifies any concerns about the independence of the board members and potential conflicts of interest. We believe it is beneficial for there to be a structured approach to bringing new directors onto the board periodically to refresh the group and to help with succession planning. In Europe, the focus on gender diversity resulted in a renewed focus in a number of markets on requiring that boards increase the representation of women to at least 30% (and in some cases 40%) within a specific time frame. BlackRock views board diversity to be broader than gender alone. We expect independent directors on the board to have the necessary breadth of experience and diversity of skills to enable them to discharge their duties to shareholders. For example, we had concerns regarding the mix of skills on the board of a major Australian financial institution, which had recently made a significant investment in China. BlackRock noted that none of the independent directors had any Asian experience. We saw this as a potential risk to the long-term value of the company. We engaged with the chairman, who agreed with our concerns and noted that the board had attempted to appoint an independent director with Asian experience but had found it difficult to find the right candidate. The board was considering establishing an Asian Advisory Board as an alternative. Members of an advisory board do not have the same accountability to shareholders as directors, thus we would prefer the company to appoint a suitable director, perhaps in addition to establishing an advisory board. Engagement with the company on this issue continues.
Human Rights in the Supply Chain Our engagements on human rights in the supply chain, including child labor, have enhanced our understanding of the risks that companies are exposed to, either directly or indirectly through their suppliers or contractors, and the steps that can be taken to mitigate those risks. A common theme we heard from companies is their need for both a legal license to operate, and a “social license” to operate, in order to reduce the risks of financial and reputational losses. Our engagements covered a range of themes. Engagement with a UK-based company and its stakeholders on the company’s US school bus operations, covered improvement in safety policies and procedures across all its operations, especially on the issue of staff training. We also engaged with a Swiss-based company concerning child labor in the Ivory Coast, which has been an ongoing issue, as have dangerous practices throughout its supply chain. In the US we engaged with a company over the use of child labor among tobacco farmers across Central Asia. India has been a country of focus, given the number of companies with targeted programs to assist workers and communities. For example, a UK-listed natural resources company has developed a social work program in India on issues concerning safe motherhood programs. This engagement also included an overview of medical and educational benefits provided to the communities located around their mining operations. Another engagement with an Australian mining company covered its use of home-working children, with the company funding educational programs that are provided around their work.
[34] TAKING THE LONG VIEW—ANALY ZE
2
3
Managing Sustainability in Real Estate There are primarily three areas where BlackRock operates in direct real estate investing—acquisitions, developments and management of our existing assets. For acquisitions, we deploy third-party consultants to perform analysis of the building’s condition, which includes systems such as energy management or if the HVAC system is efficient or not. For our development projects, we ask our developers to do a sustainability analysis at the beginning of each project to determine whether it is feasible to obtain accreditations such as LEED. We identify the costs and timing as part of the overall analysis. The impact to cost for construction with the added sustainable materials and systems is balanced against the return profiles of each deal. For our existing portfolio, we manage our buildings as efficiently as possible and we deploy a multitude of technologies and strategies. Technologies deployed include real-time monitoring of our energy, water and waste consumptions; buying energy with an aggregation portfolio so we can get the lowest price; and upgrading to the next-level technology such as LED lighting and sensors to lower our consumption. Where applicable, we get certification for Energy Star and LEED. When it’s time to spend capital dollars, we deploy the latest technology and design the most efficient systems so our buildings can stay competitive. We are also active members of the US Green Building Council, which produces the LEED designation and ULI/GreenPrint. Through these memberships, we participate in council meetings to discuss policies, learn about innovations and technologies that are being developed for sustainability, and talk to many of our peers to learn about their best practices. Sustainability is constantly evolving and we try to be ahead of it by being active in this space and in talking with our competitors. 2013 marked our first year of participating in the ULI Greenprint Center for Building Performance. The Greenprint Performance Report provides a consolidated view of 91 BlackRock properties, describes their current carbon footprint, and provides an important benchmark with which to measure progress in reducing carbon emissions.
Sustainable Palm Oil We continue to engage with investee companies involved in palm oil production to gain a better understanding of how they manage the various sustainability challenges they face. As part of this effort, we visited an oil palm plantation. This was an opportunity to observe the latest advances in mechanized harvesting, gathering and fertilizer dispersal. The move toward greater mechanization has been driven by increased labor costs and shortages. We were also able to review in person the various practices undertaken to recycle the majority of materials—husks, empty fruit bunches and other vegetation—used mainly as fertilizer and compost. POME (effluent) is gathered in pools where various enzymes are used to treat the water, which is then recycled. This greatly reduces the plantations’ dependence on an external water source. Modern plantations have dramatically reduced the need for pesticides by developing more-resistant strains of oil palm and the use of snakes or barn owls to combat rats and other vermin. We also visited the employee housing, recreational facilities, schools and medical facilities.
4 B l a c k R o c k [35]
5
Water Use and Management BlackRock’s CGRI team has engaged with companies during the course of the last year on the theme of water use and management. The macroeconomic trends identified include increasing population, greater water demand, declining water quality and risk to companies due to changing weather patterns. The sectors potentially most impacted are food and beverage manufacturers, agriculture, minerals and mining, power generators, and oil and gas producers. The aim has been to understand the risks that companies face and the practices adopted to mitigate the risks identified. The key factors include geography, climate zone, political and economic system, economic development stage and the regulatory environment. For example, BlackRock engaged a company that has mining operations in northern Australia. At the end of 2011 a severe cyclone there caused significant flooding, resulting in a halt to operations at the main mine for two months. The incident highlighted for the board the need to better manage water around the mine and also take into account the possibility of an increasing number of severe weather events in the future. The company has now made a significant investment in infrastructure that will better manage volumes of water from cyclones and avoid the need to shut down operations for extended periods. We also met with a large oil and gas exploration, production and refining company that highlights freshwater management as a key pillar of its environmental performance. We engaged with the company to understand how the board and management team oversees freshwater management. We explored the company’s freshwater usage levels, as well as the challenges related to the ongoing evolution of freshwater usage measurement tools. We also explored the company’s leadership on freshwater policy and management initiatives among peers, NGOs and governments, including its contributions to developing a version of a global water measurement tool for the oil and gas industry. The company indicated that these activities are intended, in part, to reduce water-related operational risk from a structural and systemic perspective, thus mitigating risks to shareholders over the long term. We learned the company’s perspective that water is a local problem of global interest—that aggregate numbers are less meaningful than statistics on operations in water-stressed regions—thus we explored project scenarios in several global regions with varying water-scarcity profiles. During the course of this engagement, we improved our awareness of key freshwater management issues relevant to this company and its sector, and gained insight into a leading company’s approach to managing these issues and thus protecting shareholder value.
[36] TAKING THE LONG VIEW—ANALY ZE
Hydraulic Fracturing Two water-related risks that have received significant media attention in the last year, particularly in North America, are the impact on water supplies of hydraulic fracturing, or “fracking,” in oil and gas production processes, and the “recharging” of aquifers with previously used water. Fracking creates both an opportunity and a risk for water suppliers. The oil and gas industry requires significant amounts of water to execute the fracking process, but fracking wells often penetrate through potable water aquifers to reach shale deposits. If the fracking well is not properly sealed, gas or polluted water can infiltrate the aquifer, destroying a key natural resource. Recharging aquifers is an increasingly common process in the American Southwest; this practice entails returning previously extracted water back to the source, thereby allowing the owner of the water rights to use the same right more than once. For traditional end users, this practice may raise concerns about the character of the water that they are consuming, but water companies assert that the water recharged into the system is treated until it is of potable quality. The other risk associated with recharging aquifers is that the process may damage the geologic structure of the aquifer.
6
To understand how these risks might impact our clients’ investments, we met with a potable water and wastewater services company serving the water-stressed American Southwest, where mitigating both of these risks was part of their business plan. In the course of our engagement we discussed the company’s potential legal liabilities associated with supplying water for use in fracking activities, the company’s processes for monitoring water wells located in proximity to fracking wells, and aquifer recharging risks. The engagement both deepened our understanding of how this issuer was navigating these challenges and provided a framework for our engagement with other issuers facing similar risks.
B l a c k R o c k [37]
Voting in the Best Long-Term Economic Interests of Shareholders PROXY VOTING PROCESS
EENN GGAA GGEE M ME E
CASE STUDIES
CO N
ORM INF
PARTN ER
GOVERNANCE THEMATICS
FR AM E
TE BU I TR
ANALYZE
TEE O V VOT
T NNT
EFFECTING CHANGE
VOTE One of our most important roles as a fiduciary is to vote at company annual general meetings and special meetings in the best long-term economic interests of shareholders. Voting is an essential part of our efforts to protect and enhance shareholder value. It’s the most broad-based form of engagement we have with companies, and it enables investors to provide feedback to the board while encouraging board members and management teams to consider and address investor concerns.
PROXY VOTING PROCESS AS AN ENGAGEMENT MECHANISM Voting is the broadest-based level of engagement we have with companies. It provides a routine opportunity for investors to provide feedback to the board, and it encourages board members and management teams to consider and address investor concerns.
1
RESEARCH AND ISSUE SPOTTING
Process begins with review of research from leading proxy advisory firms, company materials, broker research and other publicly available news flow as necessary Internally developed guidelines are applied in determining how to vote Straightforward meetings proceed to vote execution
2
REVIEW AND ENGAGEMENT
3
VOTE EXECUTION
In-depth research and review of particularly complicated or controversial matters
Vote positions reconciled against holdings to ensure clean operating environment
Leverage expertise of portfolio managers as necessary
Votes are executed through an electronic platform
If warranted, schedule an engagement with the issuer’s executives or board members to discuss key questions or concerns
For exceptional conflict issues, votes are cast as instructed by independent fiduciary
Remainder are flagged for additional research
BlackRock tends to enter into a private dialogue with company management and board members where we have concerns. As a long-term investor, we are keen to build constructive relationships with companies, and we believe this is more likely to occur if we allow them time to address governance issues before we escalate to voting against management recommendations. We do not disclose either publicly or privately in advance of a meeting how we have voted or intend to vote. The one exception is that in markets where it is expected, we will privately advise the company when we intend to vote against management resolutions, to ensure that they understand the reason for our vote against and the change we expect of them.
Oversight committees receive monthly vote reports and generally meet quarterly to review voting
Transparency in How We Vote
“
We believe that concerns about governance should be shared privately with companies. When a company agrees to change its approach, we tend to support management and give them the opportunity to make improvements. To us, voting against management is a sign of failed engagement. RICH KUSHEL
”
BlackRock’s Deputy Chief Operating Officer
Just as we seek transparency in the companies in which we invest, as a responsible investor we also attempt to explain our stance on corporate governance and corporate responsibility to our clients, to companies and to other interested parties. Although we prefer not to publicly disclose the details of engagements with individual companies, we do provide significant information on the scope of our work. Our corporate governance and engagement principles and our marketspecific voting policies, as well as information about how we implement them, are published on the BlackRock website: www.blackrock.com/corporate/en-us/about-us/responsible-investment We provide clients with regular reports on our voting as well as with quarterly commentaries outlining market developments and noteworthy voting and engagement activities. We file our voting record with the Securities and Exchange Commission each August and post it at www.blackrock.com/ corporate/en-us/about-us/responsible-investment/responsible-investmentreports. This annual CGRI review gives further context to the data. We have a thorough process in place to help us determine how to vote. Regional committees of senior investment professionals oversee our guidelines and may provide guidance in contentious situations. The CGRI team draws on the expertise of BlackRock’s equity portfolio managers around the world in making voting decisions, and we use research from numerous leading proxy and governance advisory firms. We also conduct our own research, based on company publications, media articles and other public sources of information. We seek to reach a universal BlackRock view and vote all of our holdings consistently. However, to ensure that portfolio managers can execute votes in a manner consistent with their view of what is in the best interests of the clients invested in their fund, our process allows us to cast votes differently in those few cases where consensus can’t be reached. BlackRock has a clear policy on managing conflicts of interest, and our procedures protect the independence of the voting decision from commercial or other influences. In addition, we use an independent fiduciary to vote proxies in any case where there is or may seem to be a conflict of interest and also in any case where we are legally required to outsource a vote.
[40] TAKING THE LONG VIEW—VOTE
Proxy Advisory Firms: Just One of Many Tools It is essential that we put our resources to best use. Accordingly, in certain markets, we work with vendors who apply our proxy guidelines to filter out routine or non-contentious proposals. Non-routine meetings where further research and possibly engagement is warranted are referred back to the CGRI team, which ensures that we focus on the most pressing governance concerns. Using proxy advisory firms to synthesize information and analysis into a concise, easily reviewable format allows the CGRI team to devote its efforts to additional research and engagement. The research from proxy advisors also helps us to identify those meetings that need to be prioritized in our workflow. These will generally be the meetings of companies with governance concerns or insufficiently clear reporting.
our own analysis We do not follow any single proxy advisor’s voting recommendations, and in most markets we subscribe to two research providers and use several other inputs in our own analysis in advance of making our voting decision.
Using executive compensation as an example, since it is a topic that attracts a lot of attention, we would short-list those companies where we have identified compensation concerns after a review of the proxy advisory firm research. We would review the company’s own disclosures and other information sources such as compensation databases. If we were still concerned that pay practices are not aligned with shareholders’ interests, we would engage the company to discuss our concerns and our policies on compensation (which are available on our website). The engagement would be with management if we’re clarifying technical aspects of the policy (such as holding requirements) or with a board member if we are deeply concerned about the policy overall. If we’re not convinced that the company has a sound explanation for the current approach or will respond to our concerns in the near term, we will vote against the remuneration proposal, and in some markets also vote against the reelection of the directors serving on the compensation committee. That said, in our experience, most boards meet our expectations by setting compensation policies that align management rewards with performance and returns to shareholders.
B l a c k R o c k [41]
Voting Statistics BlackRock assesses shareholder voting case by case, considering each company’s unique circumstances. As a large global investor, BlackRock votes at thousands of shareholder meetings, and decides on over 125,000 proposals each year.
PROXY VOTING PROCESS AS AN ENGAGEMENT MECHANISM
Number of Meetings Voted
Number of Proposals
% of Meetings Voted Against One or More Management Recommendations
United States
3,665
29,572
29%
6%
Americas (ex-US)
1,650
12,316
51%
12%
United Kingdom
933
11,482
14%
2%
EMEA (ex UK)
2,405
26,041
41%
8%
Japan
1,950
19,535
65%
13%
Asia Pac (ex-Japan)
3,804
27,388
50%
12%
TOTAL
14,407
129,334
44%
9%
Region
% of Proposals Voted Against Management Recommendation
BlackRock on average across all markets votes against management’s recommendation 9% of the time. We vote against management most frequently on shareholder proposals to implement corporate governance provisions that we believe to be following best practice, and regarding anti-takeover provisions, which we view as a transfer of authority from shareholders to the board.
[42] TAKING THE LONG VIEW—VOTE
PROXY VOTING BY PROPOSAL TYPE Proposals
% of Proposals Voted Against Management Recommendation
Anti-takeover Related
1,286
23%
Capitalization
9,527
18%
Directors Related
68,922
8%
Non-Salary Compensation
10,227
16%
Reorganization and Mergers
4,743
8%
28,844
7%
Compensation
163
4%
Corporate Governance
102
32%
2,039
6%
481
5%
Management Proposals
Routine / Business Shareholder Proposals
Election of Directors and Related Proposals Miscellaneous Social, Ethical and Environmental Issues
Market Discipline Works Well Some companies and representative bodies are concerned that proxy advisory firms might have undue influence over investors. We believe that investors should apply due diligence in holding their data providers, research vendors and proxy advisory firms accountable. Meanwhile, we’ve seen proxy advisory firms take steps to address potential conflicts of interest and increase transparency. As we have commented in the industry consultations undertaken on the issue, we don’t believe that investors will benefit from codifying in regulation standards for transparency and for avoidance of conflicts of interest. We believe that institutional investors are well positioned to impose market discipline on proxy advisory firms. For our part, we will monitor how well our service providers implement the code of conduct developed in 2013 by practitioners.
focused analysis An in-depth review of compensation at each company takes at least two to three hours. We voted on 11,000 compensation proposals in 2013. The proxy advisory firms are an important tool to help us efficiently focus our efforts on those companies where there is a misalignment between rewards and performance.
B l a c k R o c k [43]
Voting in Practice Although the majority of shareholder meetings are relatively routine and uneventful, each year we are involved in numerous high-profile or contentious situations that require close analysis and engagement. The following examples give a sense of these, as well as some general voting trends on topical issues.
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Better Disclosure to Head Off a “Board Spill” BlackRock had concerns regarding the number of securities an Australian company was proposing to issue to its CEO. It appeared to BlackRock that the company had changed the way it valued the securities issued under the long-term incentive plan at grant date. (The securities to be issued were zero exercise price options.) While the company’s share price had almost halved since the last grant of securities, the proposed number of securities to be issued was nearly 10 times the amount granted in 2012. There was no disclosure in the remuneration report regarding any change to valuation methodology. BlackRock held a number of meetings with the company. We insisted that the company disclose this information to all shareholders via an announcement to the stock exchange. While we supported the remuneration report on the basis of constructive engagement, enough shareholders voted against it that it failed and a “first strike” was received. The company then made appropriate disclosures to the stock exchange. The company now has a better understanding of the disclosure standards expected by institutional investors. BlackRock plans to continue engagement with the company to ensure improved disclosure in future remuneration reports. We hope this will help ensure shareholder support, to avoid a second strike, or failed vote, which would result in the full board having to stand for reelection and being at risk of removal (known in Australia as a “board spill”).
Supporting a Board through Potential Reconstitution We conducted extensive engagements in the lead-up to the annual general meeting of an Italian financial institution at which the board of directors would potentially be reconstituted. In this case, under Italy’s voto di lista system, three slates of directors were proposed by different shareholder groups. BlackRock’s policy in these situations is to support the slate that we believe includes the directors who will serve in the best interests of our clients as minority long-term shareholders. In coming to this decision, we engaged a number of times with representatives of the shareholder groups and the secretary to the supervisory board, and also followed developments in the press in relation to one of the slates presented. We also held internal discussions with the sector analyst who expressed support for the incumbent management team and who highlighted the need for continuity of management and the board. We reviewed which candidates from each of the three slates were likely to be appointed, based on the shareholder structure and expected levels of support. In light of this, we voted in support of the slate that would reconfirm the chairman and several key members of the supervisory board—thus reducing the likelihood of any changes to the management team—as well as bring an element of refreshment with some new independent directors.
[44] TAKING THE LONG VIEW—VOTE
2
3
Voting Against Leads to Improved Share Price We conducted extensive engagements with an Irish pharmaceutical group that was the target of an unsolicited takeover bid by a privately owned pharmaceutical company. The company was holding an extraordinary general meeting to approve a number of transactions that, if approved, would result in the bid’s lapsing, under Irish takeover rules. We engaged with management to understand the history of the company, the new strategic direction, the rationale behind the transactions proposed and the timing of the announcements. We engaged separately with members of the special transactions committee that the board had established to provide independent oversight to understand the process under which the transactions were evaluated and recommended, the timeline of the discussions and when the new strategic direction was first agreed on. We also engaged with representatives from the bidder to understand its strategy and the rationale for the takeover bid, including the structure. Finally, we held internal discussions with the sector analyst to get a view on the quality of the management team, the strategic direction and the value of the transactions in comparison to the value of the offer. The conclusion was that the new strategic direction was sensible for the business but that the offer undervalued the company. We ultimately took the view that the board and management team had been evaluating these and other transactions in line with their new strategy for some time and had applied a rigorous approach to considering the competing offers. We therefore supported management in all proposals. In the end, other shareholders agreed, and the potential acquirer was forced to lapse its offer. The company has since put itself up for sale, inviting the original potential acquirer to participate. As of the date this was written, the shares were trading above the final offer price from the original potential acquirer.
Voting for Succession Planning Two governance-related shareholder proposals were submitted to a shareholder vote at the annual general meeting (AGM) of a real estate company. The concerns expressed by the proponent of the resolutions were related to the quality of the succession process at the company. In particular, the new CEO had been appointed within days of the sudden resignation of the company’s former CEO, and there were existing ties between the chairman and the new CEO, leading to further questions about the robustness of the candidate search. Shareholders, including BlackRock, supported the vote of no confidence on the CEO, which resulted in a 63% majority support at the shareholder meeting. The vote to remove the chairman from the supervisory board received 70% shareholder approval, only 5% short of gaining the required 75% majority. During an extraordinary supervisory board meeting following the AGM, it was decided that the CEO’s employment contract would be dissolved, while the supervisory board chairman decided to resign of his own accord.
4 B l a c k R o c k [45]
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Voting Drives Company to Settle with Activists At a US-based oil and gas company, an activist hedge fund sought to remove directors via a written consent solicitation and replace the entire board with seven of its own nominees. Key concerns cited by the activist included: significant and sustained underperformance, shifting strategic focus, poor capital discipline, excessive executive compensation relative to peers and performance, and questionable related-party transactions. Members of the CGRI team met with both the activist and management teams to explore the areas of key concern, to evaluate the activist slate’s proposed strategy for the company (including planned leadership changes), and to consider the number of board seats the activist nominees would need to effectively drive change, among other items. Ultimately, BlackRock voted to remove the four longest-tenured directors and elect four of the seven activists, based on their experience and expected abilities to contribute to a strengthened and constructive board going forward. Faced with a rising tally of shareholder opposition, the company settled with the activist two days prior to the expiration of the consent solicitation; as part of this settlement, the board was expanded to include four activist nominees, all of whom BlackRock supported.
Shareholders Drive a Spin-Off without Taking Board Seats Activist shareholders supported a shareholder proposal requesting that the board of a US industrial conglomerate evaluate a spin-off of one of its major businesses. The activists asserted that the combined firm’s stock was trading at a discount that could be solved through a spin-off. The company asserted that the combined firm was able to provide a differentiated and superior product to customers of both businesses and that the board had a demonstrated history of making difficult strategic choices in the interest of increasing shareholder value. BlackRock’s CGRI team partnered with a fundamental equity team and undertook a fundamental analysis of the proposal; we engaged with the activists and the company to explore specific assertions made by each side. BlackRock ultimately determined that a vote against the shareholder proposal was in the best long-term interests of shareholders. Nonetheless, the proposal was supported by a majority of shares voted at the meeting, and the company subsequently announced that it had decided to implement the spin-off.
7 [46] TAKING THE LONG VIEW—VOTE
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Voting Makes a Difference A Japanese bank that went bankrupt was injected with public money to manage its debt. The capital injection was financed by the issuance of preferred stock to the government’s financing agencies. Since then, the bank made significant efforts in reducing funding costs as well as cutting legacy assets and succeeding in improving its balance sheet. The bank has sought shareholder approval for items necessary to implement its recapitalization plan, enabling it to repay the taxpayers’ money, while avoiding conversion of the preferred stock into common. The proposal garnered support from its key shareholders, including BlackRock. We supported the plan because the bank was unequipped to repay the government and because shareholders could mitigate a 23% dilution of their stake. The plan also prevented the increase of the government’s stake to 19%, thereby circumventing regulatory control over the bank. Lastly, the plan provided an exit for the taxpayers’ money, which would become increasingly difficult if the preferred stock were to be converted.
Voting in Favor of Proxy Access A key governance issue in the US for the last few years is the concept of shareholders’ right to nominate a director candidate to the proxy (called “proxy access”). After a rule approved by the Securities and Exchange Commission on this topic was overturned, shareholders have found the question thrust back into their hands for decision on a case-by-case basis. Although some shareholders view proxy access as a tool that is only necessary at companies with governance problems, we generally consider proxy access to be a fundamental shareholder right, and do not view the proposal as a referendum on governance. Rather, we believe all shareholders will benefit from the adoption of a proxy access mechanism that includes safeguards from this right being used by short-term investors with narrow interests, investors without a substantial investment in the company, or investors seeking to take control of the board. As a result of this proactive view, we voted to support one particular shareholder proposal that would allow shareholders holding 3% or more of a company’s outstanding common stock continuously for at least three years to have the right of proxy access, even though the company did not present any significant governance concerns, from BlackRock’s perspective. In coming to our vote decision, we engaged in a series of discussions with the company to build mutual understanding on this subject, with a particular sensitivity to the company’s concern that widespread shareholder support of this proposal might be interpreted by the market as a signal that the company’s policies presented a significant governance risk. The shareholder proposal received majority support.
8 RIGHT OF PROXY ACCESS
3+
CONTINUOUS YEARS
3%
OUTSTANDING COMMON STOCK
SHAREHOLDER
B l a c k R o c k [47]
NT E EM G GA TE VO
ANALYZE
PUBLIC SPEAKING
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GOVERNANCE THEMATICS
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Quality Information, Shared Widely, Provides Insight
INFORM Corporate governance and responsible investment is an evolving practice, and BlackRock is committed to continuing to refine our approach through learning from others and sharing our perspectives. To that end, the CGRI team participates actively in the public debate around responsible share ownership, shareholder rights and corporate governance. The team also shares internally the insights gained through those external exchanges and through our own research, while it also benefits from the market and technical expertise of colleagues. Being able to draw on quality information and unique perspectives improves our decision-making and enables us to provide betterinformed commentary to clients and other interested parties.
“
Our approach to corporate governance mirrors our approach to investing. We act in the best economic interest of our investors, informed by the very best academic research, and our day-to-day experience in the markets. RON KAHN
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Global Head of BlackRock’s Equity Research, Scientific Active Equity
Oversight Committees Add Depth and Perspective blackrock investment institute The BlackRock Investment Institute (BII) produces information and thought leadership, and promotes systematic knowledge sharing across BlackRock. The Institute hosts periodic forums among senior BlackRock portfolio managers on topics of cross-cutting relevance. Recent topics have included, for example: implications of weather patterns on commodity and energy markets, sovereign risk, impact of urbanization on China and emerging markets. The findings from these forums are often published externally.
In each region the CGRI team benefits from the counsel of a corporate governance committee that acts as an information exchange and a sounding board on a range of topical and controversial issues. The committee members are senior investment professionals from relevant investment areas—fundamental equity, scientific active equity and index—augmented by ex-officio representatives from legal and risk functions. Their input helps ensure that the CGRI team’s work is always undertaken in a shareholder value context and that the team is alert to market developments. Our regional committees oversee: Americas
Asia Pacific
Europe, Middle East and Africa
The regional oversight committees approve the proxy voting guidelines developed by the team for their regions, monitor reports on the CGRI team’s engagement and proxy voting activities, provide advice on high-profile and controversial governance situations as required, and consider regional policy issues. An overarching, risk-based perspective is provided by the global corporate governance committee, which is responsible for global operational policies, such as those on share lending recall to facilitate voting, and for confirming the appointment of the independent fiduciary to which we outsource voting in those situations where it is required by regulation or where BlackRock has a conflict of interest.
[50] TAKING THE LONG VIEW—INFORM
The Wider Debate As noted, we inform clients about our voting and engagement policies and activities through direct communication and through disclosure on our website. We also contribute to the body of knowledge about governance and responsible investing through participation in market surveys and academic research, in working groups promoting changes to address market deficiencies and in conferences and publications to build understanding and air new thinking. Some examples of this aspect of the CGRI team’s work in 2013 are set out below.
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Academic Research Contest Promotes New Thinking BlackRock and the National Association of Corporate Directors (NACD) issued an invitation to undergraduate and graduate students, PhD researchers and university faculty to participate in a global challenge to apply the latest in academic theory to develop innovative corporate governance practices. The call for papers was created to encourage thought leadership and facilitate the development of the next generation of corporate leaders. Submitted papers were judged by leading practitioners and academics based on how effectively the ideas presented can be implemented to enhance corporate governance and responsible investment business practices. In addition to cash awards, winners were recognized at NACD’s 2013 Spring Forum where they had an opportunity to present their winning ideas to corporate directors and other business leaders. The winners were: Yu Zhang, assistant professor of strategy at The Paul Merage School of Business at the University of California, Irvine, and Javier Gimeno, professor of strategy at INSEAD in France. Their winning paper is titled “Earnings Pressure and Long-Term Corporate Governance: Can Long-Term Oriented Investors and Managers Fend Off Short-Term Analyst Earnings Pressures?” Submissions were received from 37 colleges and universities, across 6 continents and 13 countries: Australia, Brazil, Canada, Ethiopia, France, India, Japan, the Netherlands, South Africa, Spain, Switzerland, the United Kingdom and the United States. For more information about the program, visit: www.NACDonline.org/CallForPapers
B l a c k R o c k [51]
Contributing to Governance Research from Australia Executive Remuneration The CGRI team decided to investigate the impact of recent changes in legislation relating to long-term incentives (LTI’s) in executive remuneration packages in Australia. The study compared the structures of LTI’s in 2005 (when the nonbinding report on remuneration was introduced) and 2011 (the second year of the “two strikes” legislation. The research raised concerns about a “cookie cutter” approach to the structure of LTI’s since the introduction of the nonbinding vote in 2005. The research questioned the effectiveness of such structures.
Diversity In June 2013, BlackRock released its second annual research report on gender diversity, titled “Glacial Change in Diversity at ASX 200 companies,” in which we assessed the progress toward meeting the new ASX governance standards. One of the key findings of the analysis was that 65% of diversity disclosures were considered perfunctory. In other words, most companies were applying a largely “minimal standard” mind-set to their diversity reporting obligations. Other key findings included: The number of nonexecutive women on boards increased since the 2010 study, from 14% to 17%;
There was little increase in diversity at senior executive levels;
There was a lack of disclosure regarding the governance of diversity policies;
There were limited signs of senior-level diversity programs;
There was a lack of policies on pay equity; and
Nearly 19% of companies fail to meet the basic disclosure requirements, a concerning level of noncompliance with the new requirements.
Given the focus on gender diversity by leading politicians in Australia, the glacial change in diversity on boards and at senior executive ranks increases the risk that quotas will be imposed, as has happened in European markets.
[52] TAKING THE LONG VIEW—INFORM
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key speaking events CGRI team members spoke at over 75 events in 2013. Some of the highlights were: The Eumedion Annual Conference in Utrecht: BlackRock’s view on the relationship between companies and investors with respect to the long term.
The European Corporate Governance & Company Law Conference in Dublin: European company law and corporate governance—a modern legal framework for more engaged shareholder and sustainable companies.
Tower’s Watson panel session for Corporate Secretaries regarding executive compensation in Madrid: BlackRock’s views on executive pay in general and in Spain in particular.
A conference in Madrid organized by Insituto de la Empresa: BlackRock’s approach to corporate governance and responsible investment.
A panel session at the DSW/EuroFinuse International Investors’ Conference in Wiesbaden: The UK Kay Review and exploring a longer-term, sustainable approach in investment.
Roundtable discussion in Zurich organized by Innisfree M&A Incorporated on share blocking: The mechanics of proxy voting in Switzerland.
Panel discussion at the AFEP, the French association of private enterprises in Paris: Corporate governance and the use of proxy advisory research.
The European Pension Fund Investment Forum Seminar in Zurich: Environmental, Social and Corporate Governance (ESG) Strategies—Can You Achieve Returns and Meet ESG Objectives?
Panel discussion at the German Investor Relations Conference (DIRK) in Frankfurt: The new impediments faced by foreign shareholders when voting at shareholder meetings of companies issuing registered shares.
A panel discussion at the COMMIT!Forum, Sustainable Wall Street: Capturing untapped shareholder value and mitigating undiscovered risks and volatility.
A presentation at the Broadridge Conference on End-to-End Voting Confirmation: What we have learned and what’s next.
A panel discussion called Rethinking Your Standard Proxy Disclosure: Regarding emerging disclosure practices.
A roundtable discussion at Center for Audit Quality: Investor and Director Expectations.
A webcast panel hosted by RR Donnelley: Trends in executive compensation design and disclosure.
A roundtable hosted by PwC: How to measure the total economic, environmental and tax contribution impact of a company in dollar terms.
A panel at the Society of Corporate Secretaries Regional Meeting: On board succession planning and director diversity.
A panel discussion at the Conference Board’s 2013 Ethics & Shareholder Value Summit: On BlackRock’s approach to integrating social, ethical and environmental issues into the investment process.
A panel discussion at the Silicon Valley Energy & Sustainability Summit: Seeking shareholder value in sustainability.
Roundtable sponsored by KPMG Australia: Discussed proposed changes to disclosure of executive remuneration.
Governance Institute of Australia Conference: The future of the annual general meeting.
Citigroup Australia’s annual investor conference: ESG as part of the investment process.
A roundtable discussion hosted by The Australian Financial Review: Ethics versus shareholder value.
OECD Asian Roundtable on Corporate Governance, held in partnership with the Securities Commission of Malaysia: Corporate governance policies and their relationship to equity market growth.
A panel discussion at the NYSE Euronext and Corporate Board Member 9th Annual Board Room Summit: BlackRock’s perspective on the intersection between corporate strategy, shareholder value creation and executive compensation packages.
B l a c k R o c k [53]
The Investors’ Perspective and Public Policy
PUBLIC POLICY
TE BU I TR
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CONTRIBUTE Asset managers act as fiduciaries; consequently, a focus on clients is central to the asset management business model. In recognition of this fiduciary responsibility, BlackRock has identified financial regulatory reform as a critical issue for our clients. We support the creation of a regulatory regime that increases transparency, protects investors and facilitates responsible growth of capital markets, while preserving consumer choice and assessing benefits versus implementation costs. Historically, investors’ participation in public policy debate has been limited. However, we believe the investor perspective is critical to consider, especially given the current scope and implications of regulatory reform. As a result, BlackRock has actively engaged in discussions with policymakers on a wide range of financial regulatory reform topics, including the governance framework and shareholder rights. Our responses to policy consultations are published on the public policy section of the BlackRock website, and the corporate governance–related consultations are listed in the section below. In addition, we participate in governance-focused organizations that themselves help shape the framework within which our governance program is conducted. BlackRock is a signatory to the UN-backed Principles for Responsible Investment. We are actively involved in the International Corporate Governance Network and International Standards Organization, among other industry groups. We also participate in numerous other organizations focused on standards setting; corporate governance; and social, ethical and environmental investments.
global & local initiatives BlackRock has been a signatory to the United NationsSponsored Principles for Responsible Investment since 2008 and is involved in about 40 other global and local initiatives, such as the International Corporate Governance Network, the US Council of Institutional Investors and Eumedion in the Netherlands.
“
What differentiates BlackRock on public policy issues is the way in which we embrace change and our constructive and collaborative approach to finding workable, practical solutions that balance costs with benefits. BARBARA NOVICK
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BlackRock’s Head of Government Relations and Public Policy
SOUND REGULATORY FRAMEWORK We submitted comments to approximately 18 formal policy consultations in 2013 and participated in several informal policy-related initiatives, some examples of which are below:
Americas
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U.S. Securities and Exchange Commission: Concept Release on the U.S. Proxy System (2010) www.blackrock.com/corporate/en-us/literature/whitepaper/us-proxy-systemletter-sec.pdf Commented on the accuracy, transparency and efficiency of the US voting process, communications with shareholders, and the relationship between voting power and economic interest (including the role of proxy advisory firms in voting decisions)
2
OSC Staff Notice 54-701: Regulatory Developments Regarding Shareholder Democracy Issues (2011) www.blackrock.com/corporate/en-us/literature/whitepaper/regulatory-developments-regarding-shareholder-democracy-issues-letter.pdf Commented on slate voting and majority voting for uncontested director elections, shareholder advisory votes on executive compensation, and the effectiveness of the proxy voting system
Outcome: The TSX has adopted, and the Ontario Securities Commission has approved, amendments to the TSX Company Manual that require, among other things, the annual elections for all directors, the abolishment of slate voting (elect directors individually) and majority voting for election of directors, on a comply or explain basis
3
Amendments to Part IV of the Toronto Stock Exchange (“TSX”) Company Manual (2012) www.blackrock.com/corporate/en-us/literature/whitepaper/majority-votingproposal-tsx.pdf Commented on slate voting and majority voting for uncontested director elections, shareholder advisory votes on executive compensation, and the effectiveness of the proxy voting system
Outcome: The TSX has adopted, and the Ontario Securities Commission has approved, amendments to the TSX Company Manual that require, among other things, the annual elections for all directors, the abolishment of slate voting (elect directors individually) and majority voting for election of directors, on a comply or explain basis
[56] TAKING THE LONG VIEW—CONTRIBUTE
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Canadian Securities Administrators (CSA) Consultation Paper 25-401: Potential Regulation of Proxy Advisory Firms (2012) www.blackrock.com/corporate/en-us/literature/whitepaper/consultationpaper-25-401-potential-regulation-of-proxy-advisory-firms-csa.pdf Commented on the value added by proxy advisory firm to their clients and the appropriate oversight mechanisms for those firms
Outcome: The CSA has determined to pursue a policy-based approach providing guidance on recommended practices and disclosure for proxy advisory firms, with further information expected in Q1 2014
5
Canadian Securities Administrators Request for Comments: Proposed NI 62-105 Security Holder Rights Plans, Proposed Companion Policy 62105CP, and Proposed Consequential Amendments (2013) www.blackrock.com/corporate/en-us/literature/publication/security-holderrights-csa-071113.pdf Commented on two related proposals by the Canadian Securities Administrators (CSA) and Autorité des Marchés Financiers (AMF) of Quebec regarding defensive tactics used by corporations
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Autorité des Marchés Financiers Consultation Paper: An Alternative Approach to Securities Regulators’ Intervention in Defensive Tactics (2013) www.blackrock.com/corporate/en-us/literature/publication/defensive-tactics-amf-071113.pdf Commented on two related proposals by the Canadian Securities Administrators (CSA) and Autorité des Marchés Financiers (AMF) of Quebec regarding defensive tactics used by corporations
7
NYSE Euronext and NASDAQ OMX Letters: Request to Adopt a Majority Voting Standard for Uncontested Director Elections (2013) www.blackrock.com/corporate/en-us/literature/publication/majority-votingstandard-nyse-090413.pdf www.blackrock.com/corporate/en-us/literature/publication/majority-votingstandard-nasdaq-090413.pdf Commented on a majority voting standard for uncontested director elections
8
OSC Staff Consultation Paper 58-401: Disclosure Requirements Regarding Women on Boards and in Senior Management (2013) www.blackrock.com/corporate/en-us/literature/publication/women-onboards-management-osc-100313.pdf Commented on disclosure requirements regarding women on boards and in senior management at Canadian issuers
B l a c k R o c k [57]
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Canadian Securities Administrators (“CSA”) Consultation Paper 54-401: Review of the Proxy Voting Infrastructure (2013) www.blackrock.com/corporate/en-us/literature/publication/proxy-votinginfrastructure-csa-111313.pdf Commented on the effectiveness of the proxy voting system in Canada
Asia Pacific
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Australian Treasury in Relation to the Corporations Legislations Amendment (Remuneration Disclosures and Other Measures) Bill 2012 (March 2012) www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/ Consultations/2012/Corporations%20Amendments%20Improving%20disclosure%20requirements/Downloads/Submissions/BlackRock.ashx Commented on disclosure issues relating to executive remuneration and proposed disclosure of claw-back provisions
Outcome: On hold due to change in government
11
Response to the ASX Corporate Governance Council’s Consultation Paper Entitled “Review of the Corporate Governance Principles and Recommendations” (November 2013) www.asx.com.au/documents/public-consultations/blackrock-submission15Nov13.pdf Commented on the revised third edition of the Principles and Recommendations
The Third Edition of the Corporate Governance Principles and Recommendations was due to be released on the ASX website on March 27, 2014
12
Response to the Consultation Paper on Board Diversity from the Hong Kong Exchanges and Clearing House Limited www.hkex.com.hk/eng/newsconsul/mktconsul/responses/Documents/ cp201209r_IN19.pdf www.hkex.com.hk/eng/newsconsul/mktconsul/Documents/cp201209cc.pdf Commented on the proposal to introduce reporting requirements in respect of diversity on boards of Hong Kong listed companies
Outcome: The Hong Kong Exchange introduced requirements in December 2012 to disclose diversity policies effective for financial years ending after September 1, 2013
[58] TAKING THE LONG VIEW—CONTRIBUTE
Europe, Middle East and Africa
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ESMA Consultation on the Proxy Advisory Industry www.esma.europa.eu/system/files/discussion_paper_on_an_overview_of_ the_proxy_advisory_industry_-_considerations_on_possible_policy_options_-_esma_-_25-06-2012.pdf Commented on the debated influence of the proxy advisory industry on voting outcomes and whether a policy should be established for the industry. We believe proxy advisory firms to be a necessary tool for institutional investors to execute their voting rights due to the volume and breadth of meetings covered. Proxy advisory firms play an important role in gathering data and highlighting areas of concern. The high correlation between proxy advice and vote outcomes should not result in an assumed disproportionate influence of proxy advisory firms on investors. BlackRock believes it is ultimately up to investors to reach their own conclusion on how to vote. We prefer that any policy outcome should be of a non-binding nature such as an industry code of best practice.
Outcome: An industry working group was established to create a draft set of principles of best practice
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Danish Business Authority’s Document “The Recommendations for Good Corporate Governance” www.corporategovernance.dk/file/357339/ The submission to the Danish Business Authority came as a result of proposed changes to the code. BlackRock commented on a number of topics, including the need for the code to highlight the necessity of the board to meet with investors. Furthermore, we highlighted the need for increased information on the nomination of directors to the board and as well as the need for more transparency on executive remuneration matters.
Outcome: The code was eventually updated, although none of BlackRock’s comments were included in the final version
B l a c k R o c k [59]
ORGANIZATIONS IN WHICH BLACKROCK IS INVOLVED BY REGION Global
Broadridge Global Steering Committee
International Standards Organization
Securities Evaluation Group
Carbon Disclosure Project
United Nations Principles for Responsible Investment
International Corporate Governance Network
International Integrated Reporting Council
Americas
Aspen Institute Corporate
Values Strategy Group
Associação de Investidores
no Mercado de Capitais
Broadridge Domestic Steering Committee
Canadian Coalition for Good Governance
CERES / Institutional Network on
Climate Risk
Conference Board, Global Corporate
Governance Research Center
Europe, Middle East and Africa
Association of British Insurers
Corporate Governance Forum
Corporate Reporting User Forum
Eumedion
European Fund & Asset Managers Association
Standards Board Americas
Financial Reporting Council
F TSE Policy Group
Institutional Investor Group on
Climate Change
Institutional Shareholders’ Committee
Investment Committee
National Association of
Pension Funds (NAPF)
Shareholder Affairs Committee
UK Social Investment Forum
UK Takeover Panel Code Committee
[60] TAKING THE LONG VIEW—CONTRIBUTE
Corporate Governance
Financial Services Council
E xecutive Investment Advisory Panel
Sustainability Accounting
Conference for the Promotion of
Harvard Program on Institutional Investors
China Water Risk
Stanford Institutional Investor Forum
Australian Institute of Company Directors
European Union Advisory Council
Asian Corporate Governance Association
Council of Institutional Investors
Asia Pacific
Investor Group on Climate Change Japan Finance Association Japan Focus Group Japan Society MPT Forum Responsible Investment
Association Australasia Asia Pacific
Other Policy Initiatives
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ESG Guidance Issued in Hong Kong The Stock Exchange of Hong Kong (SEHK) issued its Environmental, Social and Governance reporting guide for listed companies. The guide was issued after consulting with the market and is divided into three sections: aspects, disclosure recommendations and key performance indicators. BlackRock engaged extensively with the SEHK, industry groups and other key stakeholders as part of this process. The principles issued in the guide will be recommended practice and, subject to further consultation, may be raised to “comply or explain� by 2015.
Ministry of Economy, Trade and Industry of Japan Hosts Corporate Governance Initiatives The Ministry of Economy, Trade and Industry of Japan (METI) hosted two initiatives regarding corporate governance. One deals with the disclosure of corporate governance information, and the other with the ways of corporate governance, focusing on the behavioral norms of board members. BlackRock participated in both and led one of the working groups. These initiatives aim to facilitate constructive dialogue between investors and issuers so that they can jointly tackle the urgent task of reviving the Japanese stock market.
3
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Implementation of the Minder Initiative Switzerland’s Federal Council consulted on its draft ordinance through which the provisions of the Minder Initiative on executive and board member remuneration is to be implemented. Overall, BlackRock believes that the proposed changes introduced by the Minder Initiative will contribute to the enhancement of the corporate governance framework in Switzerland as well as to the general advancement of shareholder rights. In particular, we support the annual election of directors; the requirement to have a remuneration subcommittee of the board; and improved disclosure on remuneration policies and practices. However, we were concerned that the annual, binding vote on remuneration places undue emphasis on pay practice as a risk factor at companies and has the potential to crowd out discussions on more important corporate governance matters.
Investors Partner for Sustainable Stock Exchanges BlackRock hosted international investor forums in both New York and London to discuss sustainability reporting. The focus of the meetings was the Investor Network on Climate Risk (INCR) proposal for a global standard on environmental, social and governance (ESG) disclosure to be integrated into stock market listing rules. BlackRock was a member of the INCR working group that developed the proposed disclosure standards. The discussion also considered the implications of the INCR proposal for the United Nations Sustainable Stock Exchanges Initiative. The meetings helped to tease out feedback on the INCR proposal and to build consensus on sustainability reporting in the global investor community.
4 B l a c k R o c k [61]
BlackRock and the United Nations Principles for Responsible Investment The six aspirational statements of the United Nations–backed Principles for Responsible Investment provide a framework within which environmental, social and governance (ESG) issues can be taken into account in investment decisionmaking and engagement with companies, clients and others. BlackRock has been a signatory since 2008. Figure 1 sets the work of the CGRI team in the context of the Principles.
FIGURE 1: ACTIONS IN SUPPORT OF THE UNITED NATIONS PRINCIPLES FOR RESPONSIBLE INVESTING
1
Principle
In support of this Principle for Responsible Investment, BlackRock:
We will incorporate ESG issues into investment analysis and decisionmaking processes
Developed a proprietary model to provide fundamental portfolio managers with an ESG risk signal for each company in their investible universe Uses its proprietary ESG-risk model to identify companies in indextracking portfolios that lag their peers and prioritize them for engagement
Offers index-based funds with screens on environmental and social factors, including tobacco, alcohol, defense, gambling and human rights
Provides ESG screens tailored to clients’ specifications
Invests more than US $200 billion in ESG strategies globally as of
June 2013
Supports research into ESG matters, in particular through partnerships
with academic institutions (e.g., Stanford University)
Provides training internally on ESG considerations
2
We will be active owners and incorporate ESG issues into our ownership policies and practices
Publishes and updates periodically our Global Corporate Governance
and Engagement Principles and suite of region-specific voting guidelines
Engages with over 1,500 companies a year, prioritizing those where
we assess there is potential for material economic ramifications for investors that may not be fully addressed by the board
Votes at approximately 15,000 shareholder meetings each year
Participates in the development of market policy, regulation and
standard setting globally
Contributes to collaborative engagement initiatives (where allowed
by law)
[62] TAKING THE LONG VIEW—CONTRIBUTE
3
Principle
In support of this Principle for Responsible Investment, BlackRock:
We will seek appropriate disclosure on ESG issues by the entities in which we invest
Encourages companies to report on ESG issues where appropriate and
material to both the companies’ viability and long-term economic returns
Encourages companies to communicate promptly and clearly when there
are incidents stemming from ESG factors
Requests information from companies regarding adoption of and/or
adherence to relevant market best practices or international initiatives
Supports, where appropriate, shareholder initiatives that do not seek
to micromanage a company’s business or that promote the long-term economic interest of fund investors
4
We will promote acceptance and implementation of the Principles within the investment industry
Supports regulatory or policy developments that enable implementation of the Principles (e.g., initiatives to guarantee shareholders a meaningful vote in corporate elections and policies to ensure that they can collaborate)
Raises awareness of PRI through our public speaking and private dialogues
Engages clients on ESG issues, as required, including offering education on developments in the marketplace and on how our work is consistent with the PRI
Actively engages the PRI Secretariat to raise awareness of
implementation issues
5
We will work together to enhance our effectiveness in implementing the Principles
Supports and participates in networks and similar initiatives to enhance our effectiveness and understanding (e.g., Institutional Investor Group on Climate Change, Council of Institutional Investors, International Corporate Governance Network, Eumedion, Aspen Institute, et al.)
Considers opportunities to collectively address relevant emerging issues at a marketwide or policy level
Considers supporting collaborative initiatives
6
We will promote acceptance and implementation of the Principles within the investment industry
Discloses how ESG issues are integrated within the investment process
Discloses our active ownership activities (voting, engagement and policy work)
Participates in the annual PRI survey
Reports to clients on proxy voting and engagement
B l a c k R o c k [63]
Our CGRI Leadership Team Global
MICHELLE EDKINS
CHAD SPITLER
Global Head 415-670-6541 michelle.edkins@blackrock.com
Global Chief Operating Officer 415-670-7198 chad.spitler@blackrock.com
Americas
Asia Pacific
EMEA
ZACH OLEKSIUK
PRU BENNETT
AMRA BALIC
Head of Americas 609-282-5983 zach.oleksiuk@blackrock.com
Head of Asia Pacific 61-2-9272-2252 pru.bennett@blackrock.com
Head of EMEA 44-20-7743-5281 amra.balic@blackrock.com
[64] TAKING THE LONG VIEW
B l a c k R o c k [65]
If you would like additional information, please contact: MICHELLE EDKINS
Global Head Corporate Governance and Responsible Investment 415-670-6541 michelle.edkins@blackrock.com CHAD SPITLER
Global Chief Operating Officer Corporate Governance and Responsible Investment 415-670-7198 chad.spitler@blackrock.com
A Process that Builds Results Our fundamental purpose is to help protect and enhance the value of our clients’ assets, through corporate governance.
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To learn more about how we are shaping global governance and protecting our clients’ assets, visit www.blackrock.com/responsibleinvestment
This document contains general information only and is not intended to be relied upon as a forecast, research, investment advice, or a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of 6/30/13 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock, Inc. and/or its subsidiaries (together, “BlackRock”) to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Any investments named within this material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material is at the sole discretion of the reader. The information does not take into account individual financial circumstances. An assessment should be made as to whether the information is appropriate for an investor having regard to one’s objectives, financial situation and needs. No material non-public information was solicited, offered or received in the course of the engagements described in this material. In accordance with BlackRock’s conflicts management policy, the voting elections made by BlackRock are informed by BlackRock’s voting policies, and all voting elections are made independently of any relationship between BlackRock and any entity whose securities are subject to a vote. Each client engagement is different, and the examples of engagements described in these materials are not necessarily representative of any or all other engagements between BlackRock and a third party or third parties. In the EU issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No.
2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Issued in Australia by BlackRock Investment Management (Australia) Limited ABN 13 006165975 AFSL 230523. In New Zealand, this information is provided for registered financial service providers only. To the extent the provision of this information represents the provision of a financial adviser service, it is provided for wholesale clients only. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). In Hong Kong, this document is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. Not approved for distribution in Taiwan or Japan. In Canada, this material is intended for permitted clients only. In Latin America this piece is intended for use with Institutional and Professional Investors only. This material is solely for educational purposes and does not constitute investment advice, or an offer or a solicitation to sell or a solicitation of an offer to buy any shares of any funds (nor shall any such shares be offered or sold to any person) in any jurisdiction within Latin America in which such an offer, solicitation, purchase or sale would be unlawful under the securities laws of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator of Brazil, Chile, Colombia, Mexico, Peru or any other securities regulator in any Latin American country, and thus, might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. BLACKROCK® is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners. © 2014 BlackRock, Inc. All rights reserved. BLK-1529 000162-BLK_UF_CGRI_2013_AnnualPRD_06BM_04/14